# A pro rata clause specifies that each policy will pay

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A Pro Rata Clause specifies that each policy will pay a proportion of the loss based on the proportion of coverage provided. For example, if an insured has two property policies, one that provides 1M in limits and a second that provides 2M in limits, the first policy will pay 1/3 of any covered loss and the second will pay 2/3. Alternatively, the policy may include an excess clause which specifies that the insurer will pay only losses in excess of the coverage provided by another primary policy. Exclusions – exclude coverage for either specific causes of loss or for specific types of property - typically designed to eliminate coverage that is not needed by the typical buyer - ex. Life insurance exclusions for suicide within two years of policy purchase Two Types of Insurance Policies a) Indemnity Contracts - the amount paid = the value of the loss b) Valued Contracts - establishes the amount that the insurer pays at the time the contract is initiated without regard to the amount of the loss caused by the insured event Insurance-to-Value (Coinsurance) Clause – specifies the percentage of the property’s value that the insurer requires the insured to purchase to receive full reimbursement following a loss (normally 80%) Ex. Assume that David purchases insurance on his building with an 80% coinsurance clause. If David’s building is worth \$2M, then David must purchase at least 1.6M to meet the requirement. If the policy limit is less than the coinsurance percentage times the value of the property at the time of a loss, then the insurer will reduce the reimbursement for losses using the following formula: Max. proportion of = ___________Amount of insurance purchased____________ loss paid by insurer Value of property at time of loss x coinsurance percentage Ex. If the policy limit is \$150,000, the property’s value is \$200,000, and the coinsurance percentage is 80%, then the maximum proportion of the loss paid by the insurer is: \$150,000____ = 93.75% \$200,000 x 0.8

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• Winter '13
• Fah
• Insurance coverage, insurer

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